After achieving victory at the All Valley Karate Tournament, Daniel LaRusso and his mentor, Mr. Miyagi, face new challenges as they return home. Miyagi seeks to open a bonsai tree shop, but their peace is disrupted by the ruthless Terry Silver, a corporate magnate and Vietnam War comrade of their old adversary, John Kreese. Silver schemes to destroy Miyagi and Daniel by bringing a new and exceptionally brutal opponent into the mix, Mike Barnes, who aims to force Daniel into defending his title. Simultaneously, Daniel meets Jessica Andrews, a helpful and supportive young woman who becomes his friend and confidante amidst the brewing turmoil.

As Kreese, Silver, and Barnes continue their psychological and physical assaults on Daniel, the pressure mounts on him to compete in the upcoming tournament once again. Miyagi advises against fighting, but Daniel's determination and pride lead him towards taking drastic measures. Throughout their struggles, the bond between student and teacher is tested, and they must draw on their inner strength and wisdom to overcome the deceit and aggression they face.